Selling a Business May Be Getting A Lot More Expensive

UPDATE 2 (January 12, 2021): With Democratic control of the Senate, the incoming Biden Administration will have an easier path to implementing its tax plan. The sense is that tax reforms — including an increase in capital gains tax for high income earners — stand a reasonable chance of being passed but a far lower chance of having an impact on taxes in 2021. More here, here, and here (with a paywall on the last link).

UPDATE (November 11, 2020): With the presidential election now behind us, focus shifts to control of the Senate. The outcome of the run-off elections in Georgia will determine whether the Biden administration will be able to enact its tax plan.

The political betting markets suggest that former vice president Biden will be elected in November. Though this is far from certain, it is useful to reflect on the implications of the tax policy changes of a potential Biden administration on the sale of a small business.

According to an overview of the proposed changes by the American Enterprise Institute, a Washington think tank, his plan would tax capital gains and dividends as ordinary income for taxpayers who report $1 million or more. This means that capital gains for high income earners will bump up to 39.6%, the highest tax bracket under the proposal. Currently, capital gains are taxed at up to 20%, so this increase would roughly double the current rate.

Whether these changes are enacted also depends on which party controls the Senate, which is currently up for grabs. Should the changes be adopted, they could be effective for the 2021 tax year.

So let's say you're selling your business for $10 million and are expecting $9 million at close with the remainder going into a seller note. Assuming $8 million in capital gains from the sale and no state capital gains tax, you'd take home $6.4 million under the current tax code and around $4.8 million under the proposed plan.

Worth thinking about if you are considering the sale of your business.

How Well is the U.S. Economy Really Doing?

UPDATE (January 1, 2021): The Small Business Pulse Surveys, which the U.S. Census Bureau discontinued in June 2020, resumed in August and are ongoing.

The news — which relies largely on expert opinion, sensational anecdotes, and the performance of stocks — can give us a warped perspective of the real economy. This is true in general, and the problem is particularly acute right now. Amid all this noise, it is wise to periodically turn to authoritative sources of data to get a better sense of what is actually happening. To that end, here are several useful references that provide near real-time snapshots into various aspects of the real economy:

• U.S. Census Bureau Small Business Pulse Surveys — The Census Bureau, known primarily for its once-a-decade census, has a broader mandate to produce data about the American people and economy. In response to the current health crisis, the organization has done a good job of tracking small business sentiment on a weekly basis, providing a good (and moderately reassuring) sense for the state of American small businesses, which are generally defined as manufacturing companies with 500 employees or fewer or non-manufacturing businesses with $7.5 million in revenue. This survey has been discontinued as of the end of June but is likely to resume in August.

• Foot Traffic — This series of charts from SafeGraph shows the impact of the pandemic on foot traffic in the U.S. and provides great perspective on how different fascets of the economy — regions, industries, brands, and even restaurant categories — are recovering. Home Depot, for instance, has witnessed a rise in customer foot traffic since the beginning of the pandemic, whereas traffic at Starbucks is still over 20% off pre-pandemic levels.

• Bloomberg Global Indicators — This dashboard shows 12 regularly updated key economic indicators from around the world. These include PMI (this is an index based on monthly surveys of private sector companies), U.S. employment, and U.S. consumer spending — all of which have an enormous impact on the current state of the economy and its near-term future.

• Department of Transportation Transportation Services Index — This index provides trends in passenger and freight transportation and shows that the pandemic has had a relatively minor impact on freight (down 8% from January) relative to passenger transportation (down 93%). The DOT also publishes a Week in Transportation, which provides updated information on the number of people staying home, the number of commercial flights, and the volume of NYC subway ridership.

• Mergers & Acquisitions — As a business owner, you may be wondering about the current state of M&A transactions. These fell down precipitously (36%) for the first half of 2020 in the U.S. but are witnessing a rise, as captured by a mid-year update by Bain & Company. The report notes that "Market volatility and hard questions about how much consumer behavior has changed in various industries make it difficult to develop conviction around valuations." Still, there's an ample amount of dry powder out there. BizBuySell also has a useful report on the state of deal activity, which shows similar trends for the smallest of businesses.

• Global Trade Update — Finally, Knoema does an excellent job of capturing the state of world trade through its tremendous aggregation of datasets. This provides a long-term view and is not as current as some of the other data, but it provides important context for the U.S. economy, which is the world's largest importer and second largest exporter.

Challenges Predicting the Path of the Economic Recovery

By Will Zimmermann

It is incredibly hard to predict the future, especially the future of the economy. How would I have predicted the economic future earlier this year?

In January 2020, I would have warned of the potential of an eventual correction in the market or a potential recession on the horizon with no mention of a looming global pandemic. After all, the stock market in January was at an all time high and had been consistently gaining for over a decade. The longest bull market on record couldn’t last forever and certainly would leave many firms’ equity dramatically overvalued.

In March, I would have given a starkly different forecast of the economy, for obvious reasons. With the pandemic dramatically touching every aspect of economic life, the impact on the economy would be severe. This forecast would have given cause for alarm about a potential deep recession and perhaps even a collapse in the credit market due to falling corporate earnings.

Writing this in June of 2020, however, my predictions perhaps fall somewhere between the two futures outlined above. I’m more pessimistic than I would have been in January but also more optimistic than I would have been in March. With the release of additional data, the prospects for America’s economic recovery seem more promising and markets have nearly risen to pre-pandemic highs. While such a quick rally is probably premature, markets are also much more oriented to future earnings so this could signal that corporate earnings past the next few months still look relatively healthy.

What does this all mean for the future of small businesses? As can be seen, it’s hard to place a lot of stock in prediction and it will always be severely lacking compared to hindsight. The next few months will have many hopeful and pessimistic headlines. The reality is that these headlines won’t be as helpful as they seem. Businesses will recover when consumer spending returns. Some consumer behavior will eventually return to normal and some of it will be reshaped by the quarantine and pandemic. This will vary from industry to industry and determine the future prospects of many small businesses.

See Also:

• Predicting the future is hard, particularly when it comes to complex systems like the economy

• Near real-time data on the state of the economy - here and here